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I-T dept clarifies on LTCG tax applicability

The central government had exempted certain modes of acquisition of equity shares from the condition of payment of STT at the time of acquisition in order to be eligible for 10% LTCG regime

New Delhi: The income tax (I-T) department has put out a draft notification specifying transactions, which will be able to benefit from the grandfathering clause under the long-term capital gains (LTCG) tax provision introduced this year even where securities transaction tax (STT) is not paid.

The Finance Act 2018 had levied a 10% capital gains tax on transfer of an equity share, or a unit of an equity-oriented fund or a unit of a business trust, wherein the gains exceed Rs1 lakh. However, it was only applicable to cases wherein securities transaction tax was applicable.

However, acknowledging the fact that STT may have not been paid in many genuine cases, the draft notification proposes a host of transactions that were exempt from payment of STT but on which the changes proposed will be applicable.

“The central government had exempted certain modes of acquisition of equity shares from the condition of payment of STT at the time of acquisition in order to be eligible for 10% LTCG regime. There can be various genuine cases where STT could not have been paid. The move to seek comments/ suggestions from industry stakeholders is a welcome step to ensure wider coverage of such genuine cases," said Garima Pande, partner & business tax services leader, EY India.

These transactions include acquisition of ESOPs, acquisitions as part of the government’s disinvestment programme and purchase of shares by non-residents in line with the foreign direct investment policy.

It will also be applicable to off-market transactions approved by the Supreme Court, the National Company Law Tribunal (NCLT), the Securities and Exchange Board of India (Sebi) or the Reserve Bank of India (RBI). The acquisition of shares under Sebi’s takeover code and off-market share purchases by venture capital funds and qualified institutional buyers are some of the other transactions.

Rajesh Gandhi, partner at Deloitte Haskins & Sells Llp said the 31 January, 2018 grandfathering benefit will be available for the purpose of the new 10% long term capital gains tax even if the shares are not purchased on the stock market for most transactions

“In situations such as mergers, demergers, ESOPs etc. which occur before January 31, the grandfathering benefit will be available even if STT was not paid at the time of purchase. The notification however does not cover situations where such corporate actions happen after January 31," he said.

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